Question 1

What is the Net Investment Income Tax (NIIT)?

Accepted Answer

The NIIT is a 3.8% Medicare surtax on certain net investment income for high earners. It applies to the lesser of: (1) Your net investment income, or (2) The amount your Modified Adjusted Gross Income (MAGI) exceeds threshold amounts ($200,000 single, $250,000 married filing jointly, $125,000 married filing separately).

Question 2

What types of income are subject to NIIT?

Accepted Answer

NIIT applies to: (1) Interest and dividends, (2) Capital gains (short-term and long-term), (3) Rental and royalty income, (4) Non-qualified annuities, (5) Income from passive business activities, (6) Income from trading financial instruments. It does NOT apply to wages, self-employment income, Social Security, pensions, or tax-exempt interest.

Question 3

What are the NIIT threshold amounts for 2025?

Accepted Answer

For 2025, NIIT thresholds are: $200,000 for single filers, $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for head of household. If your MAGI exceeds these thresholds, you may owe NIIT on investment income. Note: these thresholds are NOT indexed for inflation.

Question 4

How is NIIT calculated?

Accepted Answer

NIIT is 3.8% multiplied by the LESSER of: (1) Your net investment income, or (2) Your MAGI minus the threshold for your filing status. Example: Single filer with $220,000 MAGI and $30,000 investment income pays 3.8% × $20,000 (lesser of $30,000 or $20,000 excess MAGI) = $760 NIIT.

Question 5

Can I reduce my NIIT liability?

Accepted Answer

Yes, strategies include: (1) Maximize retirement contributions to reduce MAGI, (2) Use tax-loss harvesting to offset capital gains, (3) Defer income to future years, (4) Invest in tax-exempt municipal bonds, (5) Materially participate in rental activities to avoid passive income classification, (6) Consider qualified opportunity zones for capital gains deferral.

Question 6

Does NIIT apply to retirement account distributions?

Accepted Answer

No, distributions from IRAs, 401(k)s, and other qualified retirement accounts are NOT subject to NIIT. However, these distributions increase your MAGI, which can push you over the NIIT threshold and cause more of your investment income to be subject to the tax. Roth distributions don't increase MAGI.

Question 7

How does NIIT interact with capital gains tax?

Accepted Answer

NIIT is ADDITIONAL to regular capital gains tax. If you're subject to NIIT, long-term capital gains face a combined rate of up to 23.8% (20% capital gains + 3.8% NIIT). Short-term gains face ordinary income rates plus 3.8% NIIT, potentially reaching 40.8% (37% ordinary rate + 3.8% NIIT) for top earners.

Question 8

Are rental property owners subject to NIIT?

Accepted Answer

It depends on participation level. Rental income is generally subject to NIIT unless you materially participate (500+ hours annually) as a real estate professional. Passive rental income is subject to NIIT for high earners. However, rental income may escape self-employment tax, so there's a trade-off between NIIT and SE tax.

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